Return to the Wild West for Texas 403(b) Plans?

Cowboy Capitol

What happens on September 1, 2019 when HB 2820 takes effect? There will no longer be any “TRS-approved list” of companies that can offer 403(b) products in Texas. There will no longer be vetting of these companies by TRS.

Eighteen years ago, the Texas Legislature implemented what could arguably be described as the best system in the U.S. for regulating 403(b) plans in Texas public schools.

In 2001, the Legislature passed SB 273. This landmark legislation was a reaction to what many in the Legislature and industry groups believed were abusive marketing practices by 403(b) companies.

In an effort to end what they perceived to be a “wild west” environment for 403(b) plans, the Legislature began imposing rules on 403(b) companies, the products they wished to sell, and the marketing practices they had in place.

They gave the responsibility to regulate companies and products to the Teacher Retirement System of Texas (TRS). TRS created an outstanding program to regulate 403(b) companies and products; part of that program included implementing what we believe to be the best website anywhere in the U.S. that displays the fees and other features of every 403(b) product allowed to be sold in Texas.

A number of bills and Attorney General rulings followed to clarify the authority of 403(b) vendors and local school districts and to keep rules up to date with changes in federal 403(b) laws and regulations.

While the system was not perfect, it did accomplish a great deal in controlling the fees that could be charged to Texas educators, and it provided an excellent source of education about 403(b) products.

In 2017, TRS launched a major project to study the fees charges for 403(b) plans. The result was a proposal to cap the fees in these products more than any other state has done before. After intervention by 403(b) companies and industry groups, the TRS Board accepted changes in the fee caps that were agreeable to all parties.

Following the fee cap implementation, some industry groups lobbied to eliminate TRS’s regulation of the companies and products. Their argument was that these products were already regulated by other agencies, and TRS had failed to be a good enforcer of the 403(b) rules. They also argued there was nothing wrong with high-priced 403(b) products for a number of reasons.

Rep. Dan Flynn, a respected Legislator and acknowledged expert on Texas retirement systems and former chair of the House Pensions, Investments and Financial Services Committee, sponsored HB 2820. Senator Bryan Hughes filed a companion bill, SB 1977, in the Senate. Our company met with Rep. Flynn to see if there was any possibility of adding amendments to mitigate the impact of the bill on Texas school districts, and we testified at the House Pensions, Investments and Financial Services Committee hearing on the bill, warning of the possible unintended consequences for Texas public school districts and educators. Though we believe that Rep. Flynn had good intentions in sponsoring the bill, he and the Committee did not see the unintended consequences that would follow.

Most of us believe high fees in investment products are not good for educators, but the Legislature disagrees. Here is a quote from the Legislative Analysis of the bill regarding why higher fees in 403(b) products are not necessarily bad for educators:

“...current law requires the TRS Board of Trustees to set maximum fees for 403(b) products rather than allowing the market to determine these rates. Limiting fees may not only reduce product offerings, but also limits a company’s ability to offer services that provide valuable advice and educational tools that can assist teachers in making appropriate choices for their retirement income. Further, focusing only on fees ignores product performance and could deny teachers access to products that may have higher returns.”

While fees are not the only determinant of the value of a product, the overwhelming number of studies of investment products have shown that there is generally an inverse relationship between fees and performance: the higher the fees, the worse the performance.

The good news is the legislation did not end the restrictions on some of the past abusive marketing practices, including denying the ability for a participant to choose any legitimate 403(b) vendor or product he or she wants or for a district to provide favorable access to any 403(b) vendors. These restrictions are listed in Texas Government Code Title 109, Art. 6228a-5. Section 9 (a).

What happens on September 1, 2019 when HB 2820 takes effect?

There will no longer be any “TRS-approved list” of companies that can offer 403(b) products in Texas. There will no longer be vetting of these companies by TRS. In one incident, the Texas State Securities Board (TSSB) found that a vendor was offering a 403(b)(7) custodial account to higher education institutions and was not legally registered to do so. The TSSB issued a cease and desist order. This could never have happened in Texas public schools before because TRS would vet all the vendors. That responsibility now falls to individual districts.

Districts will need to consider the following issues moving forward:

  1. The new law still has requirements that a company selling 403(b) products must meet in order to offer products to your employees. How will you be sure that companies on your vendor list meet these requirements?
  2. Anyone can claim they represent a 403(b) company. How will you be sure they are licensed with the company and have had proper background checks performed if they come on your campus?
  3. Will your district be liable if a rogue company or representative sells 403(b) products that turn out to be a fraudulent?
  4. The law left a penalty for violation of the 403(b) rules that can be imposed on a district official that violates these rules. Section 10A. (a) of the statute states:

“A person who violates this Act is subject to a civil penalty in an amount that does not exceed:

(1) $10,000 for a single violation; or

(2) $1,000,000 for multiple violations.”

The law goes on to describe mitigating circumstances for these penalties but also allows the Texas attorney general to seek civil penalties and “recover reasonable expenses incurred in obtaining injunctive relief under this section, including court costs, reasonable attorney's fees, investigative costs, witness fees, and deposition expenses” from violators.

How will you be sure you or your district do not become subject to such penalties?

As a third-party administrator to many Texas school districts, our role is to provide compliance for Federal tax rules, to ensure timely and proper remittance of funds to the district’s 403(b) vendor list, and to assist employees with distributions. We have had the pleasure of working with many respected and responsible vendors and financial representatives, but those are not the entities and individuals elevating our concerns. We do believe a district can still provide a quality retirement plan platform, but it is just going to require more diligence.

For more information please see TCG’s publication titled “History of Texas 403(b) Legislation” and longer version of this article at

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